Health-care reform faces ‘adverse selection’

“A poorly appreciated feature of the Patient Protection and Affordable Care Act is that its creators tried to solve the cost, quality, and access problems by improving private insurance markets, not by destroying them or by creating “government-run health care,’” writes IRA Wilson, chair of the Department of Health Services, Policy, and Practice at Brown University. “ In fact, the insurance industry has supported health-care reform because it will get them more customers.” Wilson’s op-ed ran in the Providence Journal on Tuesday, June 12, 2012.

By Ira Wilson, M.D.

The U.S. Supreme Court is expected to rule this month on the constitutionality of “ObamaCare.” However the justices rule, the fact is that in the United States we have a health-care system that almost all observers (conservative and liberal) agree is far too expensive and produces health-care quality that is at best fair to good compared with other developed countries.

In addition, more than 16 percent of Americans — some 50 million people — have no health insurance. That does not mean that they can’t get any care, but it does mean that the care they get comes mostly from emergency rooms, from free-care programs, and from what they can pay for out of pocket. There is also bipartisan agreement that a lack of health insurance, particularly for those with chronic illnesses, is associated with poor health outcomes and increased rates of personal and family bankruptcy.

The Patient Protection and Affordable Care Act, enacted in 2010, tries to address these issues. The United States is the only country in which the majority of the expenditures on health care are private expenditures. That is, most of the health insurance in use comes through private health plans, and most of that is what is known as employer-based insurance that people obtain as a benefit of employment.

A poorly appreciated feature of the ACA is that its creators tried to solve the cost, quality, and access problems by improving private insurance markets, not by destroying them or by creating "government-run health care." In fact, the insurance industry has supported health-care reform because it will get them more customers.

Group insurance, or employer-based insurance, works relatively well and the ACA doesn’t do much to change how employer-based insurance works. However, for those who don’t have a job or those whose employer doesn’t offer employer-based insurance (employers are not required to offer it), the only place to turn is to the individual insurance market, and there is broad agreement that the individual insurance market in the United States is a failure.

Costs are very high, even for relatively healthy people. Insurance companies have the right to charge whatever they think they must to cover individuals and their families, or they may refuse to cover them altogether (if, for example, a family member has a pre-existing chronic, expensive illness).

So how do we fix the individual insurance market? In theory, we try to make it look more like the group insurance market by creating exchanges where people can become part of large, actuarially stable groups that will let them pool their risks with other people. But this only works if both healthy and non-healthy people are in the pool. Pooling risk means that the there are both high- and low-cost members in the pool so that the average cost is affordable.

But it is important to be clear about this: The healthy here are subsidizing the sick. It is a transfer payment from those who might need health care but don’t yet, to those who do need it now. Presumably, most of us will need care at some point. Even the healthiest of us can get in a car accident or destroy our knees skiing, immediately creating costs that for most of us would be totally unaffordable.

So why is there an argument over the individual mandate to have insurance? Because without it, those who are healthy and believe that they will remain so won’t buy insurance. Those who are sick or think they may become so will. This is called “adverse selection.” There is also what economists call “asymmetric information” — people know more about their health than insurers, so even when insurance companies do their homework about how much someone will cost them (called “underwriting”), they can only know so much. When only sick people or people with a higher likelihood of becoming sick buy insurance, their costs are high, and premiums are correspondingly high. Over time, premiums get so high that no one can afford them.

This is what we have now - a market for individual insurance that is a complete failure and 50 million people in the United States without any health insurance.

So the argument made by the Obama administration before the Supreme Court is that a critical element of fixing or restructuring private insurance markets so that people want to participate in them is to mandate that participation. The legal arguments about the individual mandate have to do with whether Congress has the authority to mandate that participation.

Regardless of what the court decides, the fundamental problems of our private insurance markets — and particularly of the individual part of our insurance markets — remain with us. If we want to solve America’s problems with cost, quality, and access using private insurance mechanisms, we will have to figure out some other way for the healthy to contribute dollars toward the care of the sick.

Note to Editors:

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